25 August 1986 Income Tax Severed Letter 5-1346 - [860825]

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Revenue Canada Taxation

Head Office

XXXX

J.D. Brooks (613) 957-2118

Attention: XXXX

August 25, 1986

Dear Sirs:

This is in reply to your letter of March 26, 1986 in which you requested confirmation of your understanding of the application of section 110.6 of the Income Tax Act (the "Act") as it applies to the following hypothetical situation:

1. An individual taxpayer owns an interest in a partnership. The partnership interest represents capital property to the taxpayer.

The individual transfers his interest in the partnership pursuant to subsection 85(1) of the Income Tax Act to a corporation owned 100% by the transferor.

3. Consideration to be received by the individual in respect of this rollover will consist of the following:

(a) a promissory note for an amount which exceeds the taxpayer's adjusted cost base of the partnership interest;

(b) one common share with a paid-up capital of $1.00.

4. The transferor and the transferee will elect pursuant to subsection 85(1) that the agreed amount will be the amount of the note issued to the transferor, which amount will exceed the adjusted cost base but will be less than the fair market value of the partnership interest.

5. Since the elected amount will exceed the taxpayer's adjusted cost base of the partnership interest, a capital gain will be realized by the transferor.

It is your opinion that none of the provisions of sections 84.1 or 110.6 or subsections 85(2.1), 245(1.1) or 247(1) of the Act would deny the subsection 110.6(3) capital gains deduction to the transferor in respect of the transfer described.

Our Comments

The transactions in your example would be subject to the provisions of subsection 85(2.1) of the Act, the effect of which would be to reduce to nil the paid-up capital of the common share issued by the transferee to the transferor.

The transactions may also be subject to the provisions of paragraph 110.6(7)(b) of the Act. If the fair market value of the transferred property exceeded the fair market value of the aggregate consideration received by the transferor, paragraph 110.6(7)(b) would deny the subsection 110.6(3) deduction to the transferor.

As subsection 85(2.1) will be applicable to your example, and subsection 110.6(7) may be applicable, it is our opinion that the more general anti avoidance provisions of subsections 245(1.1) and 247(1) of the Act would not be applied. This opinion is based on the assumption that there are no significant undisclosed facts or transactions relevant to your example. The opinions stated above are not rulings and are therefore not binding on Revenue Canada, Taxation, as explained in paragraph 24 of Information Circular 70-6R, published on December 18, 1978.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and intergovernmental Affairs Branch